The spin began even before the quarter ended. Berkshire was contacted in December by the Securities and Exchange Commission. The SEC asked why Berkshire hadn’t written down its investments in Kraft Foods
KFT
and Wells Fargo & Co.
WFC, -0.61%

Ah yes, the old Buffett standby, “intrinsic value.” Loosely put, intrinsic value is the value of a company or asset based on the underlying perception of its true value including all aspects of the business in terms of both tangible and intangible factors.

In other words, who cares what anybody would actually pay for those Kraft and Wells Fargo assets? What Berkshire investors should remember is how valuable Buffett really thinks they are.

Enter Ingrid Hendershot, writing for Seeking Alpha: “accounting rules are why Buffett advises investors to ignore gains and losses on investments and derivatives on a quarterly basis. It’s more important to focus on the operating earnings and gains in book value and intrinsic value.” Read Hendershot’s analysis of Berkshire results.

OK, so how did that go? Well, Berkshire operating earnings fell 28%. Book value rose 1.7% — this during one of the greatest bull markets in decades.

Not great, but certainly a lot better than the traditional measures: a 58% profit decline to $1.51 billion, due, in part, to $1.673 billion in losses on the insurance side of the business from catastrophes including Australian floods and Japanese disasters.

It’s the last part Berkshire investors should notice. Buffett and Berkshire have been consistent in their belief that investors should view financial results without investment gains or losses. But in the first quarter, though all the hay was made on the $506 million Berkshire was forced to write down, it was the underlying losses in the insurance business that crushed the results.

Moreover, Berkshire has a way of soft-peddling big losses on its investments. For instance, Berkshire lost $7.5 billion on its investments and derivatives portfolio in 2008. Berkshire and Buffett were quick to underscore that the losses were “unrealized.” Yet, shareholder book value fell 9.8% that year.

Good old intrinsic value recovered the next year, but the stock has been a laggard. It’s up only 25% during the last two years compared to close to 45% for the S&P 500
SPX, +0.32%
and Dow Jones Industrial Average
DJIA, +0.34%

And isn’t that in the end the real problem with Buffett’s rose-colored glasses? For all of his rationalizations about how his company should be valued and why his investments in Burlington Northern Santa Fe and Lubrizol are such great deals, the reality is that no one seems to want to buy the stock considering “all aspects of the business in terms of both tangible and intangible factors.”

They want profit growth.

Moreover, isn’t it a little bit bizarre that Buffett, who famously railed on Wall Street, wants his business to be measured by the same standards big banks do?

Investors “have lost more than $500 billion in just the four largest financial fiascos of the last two years,” Buffett wrote last year. “To say these owners have been ‘bailed out’ is to make a mockery of the term.”

Yet those bailouts would not have been necessary, or at least as big, if big banks were able to mark their own assets — not to what the market would pay for them — but for what they felt their “intangible” or “intrinsic” value was.

It’s this kind of fuzzy financial reporting — a kind of do-it-yourself valuation — that makes Berkshire and Buffett’s talk hard to take. Buffett, after all, is the one who railed on Wall Street CEOs as “reckless” but invested $10 billion in Goldman Sachs Group Inc.
GS, -0.53%

Berkshire’s latest results underscore the point. It’s one thing to say it’s sunny and warm, another to do it when your investors have been soaked.

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